Analyst Jeff Johnston with research company Arthur W. Wood (via Barron's) has some bad news about Samsung's (NASDAQOTH: SSNLF) recently announced Galaxy S9 and Galaxy S9+ flagship smartphones.
According to Johnston, citing information from the smartphone distribution channel, pre-orders for the Galaxy S9 series are down about 50% over the Galaxy S8.
Image source: Samsung.
Johnston claims that Samsung had expected 10% to 15% growth in pre-orders compared to the prior generation Galaxy S8 smartphones, so if the analyst's information is good, this is a huge miss for Samsung.
The analyst attributed this to the fact that smartphone owners are "upgrading [at] a much slower pace as features are falling on deaf ears."
He declared this to be a negative for both Samsung and the overall smartphone industry, as "smartphone sales are starting to decline at an accelerating rate."
If the Galaxy S9 series smartphones are performing poorly in the market, that's unfortunate, but not entirely surprising. Let's dive into why.
Not a big change from the Galaxy S8
The reality is that it's hard to add game-changing new features to smartphones these days, particularly flagship devices. They're all equipped with powerful processors, great displays, and excellent cameras.
The Galaxy S9 devices built upon the solid foundation laid by the Galaxy S8 series -- the processors got faster, the displays are brighter and more color-accurate, the cameras take better pictures and videos, and the design itself became a bit more refined.
Unfortunately, customers seem to care a lot about dramatic form factor and aesthetic changes, so the fact that the Galaxy S9 and Galaxy S8 devices are, at first blush, so similar probably didn't help Samsung.
The tough premium-smartphone market
On top of what seems to be an underwhelming set of improvements, Samsung has to contend with the reality that the premium portion of the smartphone market is tougher to play in.
As lower-cost devices become increasingly feature rich, with fast processors, great cameras, and beautiful screens, the value proposition of premium-priced devices diminishes.
Moreover, the competition in the premium market is becoming fiercer as traditionally low-end and midrange device makers push to build higher end, higher priced devices to boost revenue and profit.
Beyond those considerations, the overall smartphone market itself is slowing -- even the low-end and midrange portions. Now that smartphone penetration has reached such high levels, the opportunity for growth by bringing new customers into the market is diminishing. The smartphone market is increasingly dominated by current smartphone users with lengthening upgrade cycles.
The silver linings for Samsung
Although sluggish sales of the company's flagship smartphones would be a clear negative for its mobile devices business, there are a few mitigating factors to consider.
First, much of Samsung's smartphone shipment volume is in low-end, midrange, and high-end devices -- it doesn't rely solely on its premium flagship smartphones to sell well to have a relatively stable smartphone business (though growing sales of higher-end, higher-priced devices are always preferable).
Second, Samsung's mobile component business, which sells many crucial components -- such as DRAM, NAND, displays, and processors -- to other smartphone makers, continues to boom. Samsung Mobile doesn't need to perform well for Samsung Electronics to grow its overall revenue and profit from the smartphone market.
In short, the Galaxy S9-series smartphones might not be off to the great start that Samsung had hoped for, but Samsung Electronics is such a multidimensional business that this one data point isn't enough to base a serious investment decision on.
